Professional Documents
Culture Documents
4,
COST-OUTPUT
RELATIONS
A.4.1
Cost * f (output)
Thus at a
firm level, the cost purely deponds upon the two principal
factors: the'Character of the production process employed, and
the prices paid to different factor inputs.
Instead
A.452
function op output.
(l)
a + bQ
Q
&
(2)
AFC e a
Q
AVC ss bQ
Q
(3)
(4)
s= b
where ATC i3 average total cost, fifC is average fixed cost, At'C
is average variable coat end a sb and Q are as specified above.
is a linear function
They
*7
TC
sa a + btj +
cQ~
+ dQ
(s)
A 4 *3
When Q
0,
TC
a s and a
0.
/d o
d(TC)
dQ
2eU + 3d5
On fcho b a s i s c s o t h / i
c c rd lb J c r iO ., ihf- n i " - o
(5 )
fC
d(WC)
- o
dO
i
0. 2c '5* SdU
'
~
fid >
d ir
OR
6dQ
2c
is 2c
6d
~c
3d
iS~'3)
{'o*
d > 0
a h
rx =
(\ $-U)/ +
3d [
-I 1
{6s5}
oa
'
\v
3db - c?
bd
which should always be positive
9
Hare s 3cb - c"> C
(since c>
>
OR
3db > c~
OR
c <
<e. 5
i.
3db
a, c and d > 0
(ii)
b < 0
and (iii)
A4.1(1}
c2 < 3db
Statistical Cost function;
y
**
o)
'/
1/
Dohncton D,
ft. 455
written S3 *
* b1 Xit + b2 X2t +
+ bR XKt * ut
(1 .2 )
(t 1,2, . . . n)
~>c
output.
r<)
7
1 t~9
whera 3 C,
total
cocc
in oeyioc t
ss output in period t
error term
A . 6 s6
I f ?.
' t-1
t~1
FiC =
2bXt
(2.4;
2b2
2b_
1/
findings
No statistics! analysis
1/
1958 r p p !3 3 9 -3 5 0 .
2/
A.4S7
Besides,
On the other
hand, almost all the resource inputs being variable in the long
run, ths resulting cost takas an altogether a different
shape.
A,4i8
A42
fixed cost, total variable cost end total cost concepts ara
worth examining. Total fixed cost is
n
TFC
P,X,
(1
'
output level.
ivc * ^
y:,
(2)
CO
A4f9
MC
The*
It can be expressed as
TVS
{&.}
A Q
It is of central interest for ths fact that it reflects those
costs which could bs controlled in the short-run,,
Ths dsfini
tions of AFC, AVC and MC era used while a^amining ths cost
behaviour both at the micro and macro levels*.
Those cost-output relations can be examined in ths
(1 ) Q ra a
bx * cx
(incraasirig returns to
variable inputs)
(2)
Q m a + fex
(constant returns to
variable inputs)
(3)
Q s 0 + fex - cx
(decreasing returno to
variable inputs)
(4) Q
a + bx -5* cx
dx
whera8
Q is the output level0 x is the variable input and a is
ths constant
A.4*10
Thus
*?
when
and
(1 .
Q = a + bK + cx
PiP a b
2cx
A? b
ex
Hence f
TC a + bQ ~ oQ^
TFC a a
TVC a bQ - cQ*
output levels.
and greater increments when ths variable inputs arc added or,
gradually and so is the resulting TVC.
But there is
A.4S11
and
that of TVC.
Thus?
TVC bQ - cQ2
(1.4)
1/
from the origin.
Given TC = TFC + TVC
the total cost function can be written a s 5
TC - a + bQ - cQ2
<1.2)
a(b - cQ) b - cQ
(1.5)
(q ) under
1/
<1}
(2)
(2).
}
,his is bsc&use the reJationohio between AVC and Yvs'
production function
AVC
KS
P yy
, ]
1 _!
VI
<> ;
i
wH o jc s *
Vi
VI
Under the
| + b - cQ
(1,6)
ATC s ~ + b - CQ
u
(1.6)
whareS
and
AFC a ~
(1,7)
AVC a b - cQ
(l.5)
as referred to above.
There is a asympototic relationship between AVC and
ATC.
condition
A.4*13
of increasing returns to variable inputs, but rpthar ;.a o ge;y?r.and necessary trait for all the types of production and cost
1/
situations.
and
TC a + oD - cO2
(l.2)
TVC bQ - cQ2
0.4)
nc
I
dQ
2JVC
_ b _ 2c Q
(1.3)
dQ
1/
A* A ? 1 &
of v a r i a b l e i n p u t a r e
input,
tha same
for e v e r y
unit of
variable
When
0 s= a + b x
and where
a -
(2,l)
0 ? the v a r i a b l e input
PIP = 5 ,
and
a n d b is c o n s t a n t
has its
AP a b
which
is scual
to t h e s l o p e o f
the production
function.
T F C is not e f f e c t e d by
i n p u t s a n d Q.
the r i i a t i o n r h i p
between variable
Here;
T F C => a
TVC
production
to a unit
(2.2)
function
function,
pries
is t i e d up w i t h t h a n a t u r e o f the
TVC rises
by a f i x e d a m o u n t
(P.(T) o f the v a r i a b l e i n p u t .
Vi
is l i n e a r a n d b e g i n s
from t h e c r r c l n ;
equivalent
hence
T V C = bQ
(2.3)
B o t h T F C and T V C put
t o g e t h e r g i v e T C f u n c t i o n as;
T C <= T F C + T V C
T C = a + bQ
Tho
(2.4)
s h a p e s o f T C and T V C are
be s e p a r a t e d
ftt Q =
identical.
TC a n d T f C c u r v e s
by a c o n s t a n t v e r t i c a l d i s t a n c e e a u s l
can
to T FC.
TFC _ a
Q
Q
(2.5)
rvc _ bQ
(2.6 >
and s i m i l a r l y :
AV C
"
~Q
Ao4315
And
Q
Here, ~
&
+ b
(2.?)
equation ofs
ATC = AFC + AVC.
ATC curve is asymptotic to the horizontal AVC curve and
decreases throughout.
dTC
dTVC
zzr
- 'JdQ
TA
dQ
* b
(2.8)
fib e rs b i s a c o n s t a n t .
Constant MC and AVC and gradually declining ATC are
the common features of
Each
When
(3<>1}
Q - a + fax ex'
Both MP and AP of the variable input are down sloping,
TFC is a horizontal line as usual, hence
7FC = a
where
(3*2)
is s constant.
TFi. close not vary uith chs ruontiiy- oi" output iQi,
Since each additional unit of variable input adds
{3,3}
and he nc e s
/\ 1w
TC = a + bQ + el*
it
TFC
Q~
anc
AWC
TVC
is
Its scuation io
a
~
:Q -t t:Q
3
~ b J- cU
A,4*17 '
ATC b
TC
+ bQ + cQ
a + b -5- cQ
(Z*7)
whare
Sine .
AFC
Q the
AVC
Cr-> b
4A,
Thus increasing
TC o bQ -t cQ2
l3o4)
dTt
MC J q = b -v- 2cQ
,
|3.8y
no
n>vj
d ^ c r e a s i n ^ r e t u r n s t o v a r i a b l e i n p u t* p r o y i n o e u ^ o - u - i a l ?': !
o f t h e p ro d u c tio n nrtri coe i ta e rav icu rs found X''> t b s f i r s t t h r u s
ty p o s o f j?" oriu'Jtiori 'Jur>oiionr ,,
2 " a + &x -4 e .,2
uhero 6 i a th e o u tp u t,
in p u ts .
Kor:;
...4?
5;
r e c r e a n t s th a u n i t s of v a t i c
H3X'0g G2 ".v'-tUS.1.0
1f
T!
in g r e t u r n s t o v a r i a b l e i r . p u t a .
t o v a r i a b l e i n p u t s p r e v a i l , uheras i t ipevBiusnz- a t n r- in c rc e o !n g
r s t o o u s r t h e rang o f Q yhore d e c re a s in g r e t u r n s t o y c r i o b l c
in p u to CDH?flto
7ha equation uf
TVC i
TVC bQ - acT -> dST
;?i,3;
Khar a
a t each v e lu a o f Cl
\<o4;
oO
. ciQ""1} rcpvoPHV. r- VC
JC
AVC
lQ - sq2 * dCT
b cQ + dQ
(4S)
ATC can be c a l c u l a t e d by d i v i d i n g TC by Q
'u
g-~-
fta
+ b - cQ + dQ2
ATC ~
(4*6)
Hst >*
^C
n e f*
flFC T ~
&
q
if
Y)
And
irs
tha short-run.
nc s
dTC
dQ
dTVC
dQ
* b - 2cQ t 3dq2
(4.8'.'
A, ^20
constant
(1)
It
points of AUC
FiC reaches its nininura before fi'JC and ATS and At/C
reaches Its minimum before ATC,
A.4.3
C-
p Cq!k}-S-X(k)
(l)
the greater the value
In short-run5'ths
each output level with the facility to vary the size of olento
Thus such a clan'c s i r e i s s e l e c t e d vHsr t ^ s TC
pinimun
Th
c u rv e s .
ocvcg
( LKC) fallr
3/
2/
Certainly
LAG declines first kith sirs, but there -s hardly any cqresnnmh
or. ii.f. shape wit-h cutpwt ir.rrsasi ng beyond a certain levrl,
Robinson, however strongly contends the rising aspects of LAC
if
goes or* incte3$i'<9o
as outpc
ry
net U-nhapod.
(b)
ki!.r.v'' .:-'l:i
manageable bounds.
3/
2/
3/
4/
A-4S23
cost
*?V'C C3
itf s n
c u rv e .
o f f c ? r.
ic
e ra
D e s p ite
th is .
to
o ff
chop
sees j t'-t
la s t
s o m e tjL n o a
t;ha
rjs io o
&f> i
9 th e
pc> r i
1s t
firm
has
o f" i t f !
to
cost
m ake
r. u ' . ' v c
o p c D a v e : i o n .
studies.
lS'I
in d u stf'
r.
2/
study of business enterprisan0
siatsnt
11/
with a large body e? empirical 8uider.ee.
T?.o
Cfohnstars,
Industry Study "ffiuiiiplo P r o d u c t - using
tintsseries data short run cost curve (1960)*
(Statistical Cost Analysis).
Dear., 3s Industry Study! 5Furniture*
using tic;
series data short run cost curve (194Hi
("Statistical Determination of coats with special
Reference to Marginal costs" Studies in Suctip^r.
Administration, Vol.7, 1935).
Industry Study Hosiery" using time ssrioc.
data Short run cost curve (1941)
(Statistical Cost Functions of & Hosiery Kill5 >
(Studies in Business Administrationt Voi.14, 1S41).
-j Industry Study *Departmental Stoca using tints "
series data - short run scat curve (1942)
- (Department Store cost Functions8 Studiaa In tlatbr
matical Economics and Econometrics (sd 0 <orton).pp 2 2 2 -2 5 4 5" 1 3 4 2 )7 "
If
Dohnston, 3 .s Ibid.
30
overwhelming.
by
Ezakiol
on
However c mention
1/
Ezekiel,
and KH Wylie? Industry Groups 11Steal* =using time-series data short run cost curve,-.(]$4-i}
{"Cost curyea for Steel Production' journal of
Political Economy, Vo.!046, 19 40, pp ?77-32lT$
'Cost Functions for the Steel Industry" Journal of
American Statistical Associat i o n , Uol.36, 1941,
pps91-99.
Nordin, 3 A. .Industry Groups 5 Light Plant8 using timeseries data short run cost curve (1947), ('Nets
on a light Plant's Cost curves' Econometrics, Vol.15,
1947, pp. 231-235).
Ehrks, K.S Industry Group8 'Cement' using time-sarieo
data - short run cost curve (1933), (Oje Ufagyzsupung
in der Zementindustrie, 1858-1913, Jena r 1933}.
% [
3/
4/
A.4S25
details cf total cost and output Tor the psrioc! ISSA-IB. hsvs
been estimated by Gupta,, For the industrywis plants belonging
'jfjmbst
to each size-group
emolcyadj total rest and oubp
cost par rupee of output was worked out for estimating the cost
functions,,
2/
2/
cost. curves in only fivs inaustrisa
twsnty~nin3 industries.
cut o' n s a ^ - j a of
1/
among as many as eighteen cf :nssa industries
revealed a slightly rising leg of the L,
2/
2/
3/
A4?2S
APPENDIX
5. TECHNOLOGICAL RELATIONS
SPATIAL DIMENSIONS
A.5
Ah^ l /
sU
(1)
where X stands for the net value added by manufacture, K for the
capital and L for the labour (number of technical and non-technical
workers of all categories including supervisory, and managerial
j/
catecory) employed;
if
oi + jb , where Ot and j$
measure
1/
2/
A.5:2
.1/
cross elasticities
to K and L respectively.
This
2/
both K and L leads c.utout to increase by ( ot + j2 ) par cant.
(2)
2 /
3 /
A.513
The sum of these parameters { o< and E> ) shows the dogres
1/
p !>
+ p
o(
f
such a s :
<
>
+ p>
is equal to one.
The maroina;
A.5.1
The
tho consiJo;cc
production relation,
for examples
(a) Marginal productivity
of capital (MP,,)
K
Average capital
productivity
Klein Lawrence, R.s An Introduction toJlcof^jijgtxics^, (PrenticeHall of India Pvt. Ltd., 1969), p.92.
(b ) M arginal p r o d u c t i v i t y
o f Labour (F'1P? )
Average Labour
productivity j
-j'.. .u u
'-oi
Mr3,
K
TP
* K
i
v,C
11> 1
L.
A P</L) / (K/L?
A MRTSRL/ M RrSKL
Thus
When C7 ~
and
fsctcc input.!
&
"
.;>
r.sd mro.;,-v,i
o,~
each other
Higher value of ETS leads to the hignec degm-e of subatitnf, nbl.ity
between factor .'.npurs .
fi.5s5
ft.5.2
" RTV
b represents the coefficient of elasticity of substitution,.
where
b e.ETS
MRTS
Kl
. ^HsZkL. / A____
' (K/L)
FIRTS
(D
'KL
b =
(2)
kl a
where?
k
k stands for the capital-labour ratio (*j~.)5 s stands
for the ratio of the marginal papduct of labour (PIP. ) over the
'L.
product isoquant.
JL/
2/
Allen,ft.G.04 Mathematical Analysis for Economist (London, fiecHillan and Co. 1930), p p 5340-344.
A5 ?6
m,t.
mrts
(3)
IS*
w here u = t h e p r i c ? a r : a o c u r , and
r the p ric e of c a p i t a l .
E q u a t i o n ( 1 ) can ba r e w r i t t e n a s ;
A (k./y / A(w/t
" ( k/D V T f c ) ~
(5)
or
%A
or
(w/r)
~ 10
A.(w/y
r= oi
{w/r}*
t h e c a p i t a l ~ l a b o u r r a t i o i n c r e a s e s by 1G p e r cant,, t h a t i s s
%. A
(K/L)
k^ lT
= 20
T his i n d i c a t e s o b v i o u s l y t h a t b ( e l a s t i c i t y of s u b s t i t u t i o n
in c n ? 0
j/
giv-rn
v;,-;.!';egc nb-intjO
. iv /;- ,
f l t e h e f c t , O a l b R r t , A.s " C a p i t a l - l a b o u r s u b s t i t u t i o n i n t h e
M a n u f a c tu r in g s e c t o r of Panama", i n Economic Development, and
C u l t u r a l Change, V ol.2A f A p r i l , 1976.
A* 5 ;7
loss thar' or
-r...iXy
j-^ii'Sc
:*)r
vV
j.
u,,r
f j
(6)
17)
A5 50
ft
'
<>
the entrepreneurs
to
remains constant
1
/
(b) is lass then
in b always
An increase
y
of uhich reduces the output rate.
h S O p . c i t p.581
_1/
Fitchett Delbert
2/
1966).
A . 5 ;9
A -5 o2
(ccs) FP.ooucnem
Constant-elasticity
of s u b s t i t u t i o n
production
funriior
J/
(popularly
known,
production
function.
function
cf
ss
unitary
production
handj
CSS
production
It
special
case,,
It
of
function,
line C E S
an
along
Cobh-Douglss
the
rsmavss
production
known
production
tbs
the
constant
ment
the
of
CES
elasticity
production
c
Y
is
bK
output
function
(net
ocher
However,
put
of
sub
forward
or
both
by
them
/
The
formal
state
i s
/r
(D
(l-b)l
value
the
v / j?
P \
-n
c r.
elasticity
substitution.
~p
Y ss
where
of
Limitation
{U O U 5 -.? !
characteristics
function.
of
production
function,
of
~.1sb~
r.sw
by
2
presume
serious
shown
measurement
other
in
Cobb-Douglas
substitution
explicit
with
function]
includes
elasticity
provides
stitution
the
as
added
by
manufacture),
and
are
3/
UDriabie
are
irsputs-CEpitai
parameters;
and
labour
represents
respectively,
the
degree
of
end
a,
homogeneity
and
of
the
function.
'}J
Arrow,
or
Cher.ery,
production
BeS . P i i n h a s .
and
2/
Sarthwal
end
R.fl.
H.fi,;
Solouj
"The
lasts
for
Indian
CES
function
its
of
is
limited
spsc.ificat.ion
production
K.3.,
of
this
HB,
"Capital-labour
Review
Economics
W o , 3,
production
popularised
Arrow
new
class
Chenery,
substitution
E c o n o m i cs
and
S t a t i s tics
1961.
R e v i e w a Uoi-4,
Function
Solow
See
L f f i c i e n c y *
N o , 3,
Empirical
3/
and
Economic
\Zol.43,
M n h a s
function.
is
1975,
to
of
Paper
Industry**,
p.174
unlike
two
Production
S o u t h e rn
"
the
CobbDouglas
factor-inputs.
and
estimation
with
very
difficult,
if
Function;
more
not
Some
Economic
~
product ion
This
is
than
two
impossible.
because
factors
CES
Contd.
4 . G 31 C
1/
input intensity parameter .and substitution parameter,
also referred toss the Hicks ~ neutral parameter,
z is
The role cr
The scare
3/
5/
Contd..,
production functions, however, have been estimated taking
more than two factor-inputs. Sees Mukerji, V, >!"he CES
or SMAC Production Function with more tnen two Inputs;
A Generalization",
Indian Economic Journal, Vol.1?f No,3,
1964-65.
...
- -
j/
2/
3/
Arrow K.3,, H.B, Cbenery, 8.S. Minhas, and R.tt. Solowt "CapitalReviaw of Economics
n5si *
) measures the
relat-iva
*i
Here.
fsr
equivalent to
__ _ (1 - <?)
' }
c'
oo
<
>
t'-'ci.:gn
>a
JJ
3>
_3/
A5 s12
f ~O s
When
(*)
Y = ZKb L 1 b
further,, when
P>
^ __j. +
p= -1,
P >/ 0
0,
And when
And when
P<
0 and
Here
f <. 0,
Here
input ratio.
3/
2/
MRTS.a
LK
MP
PIP,
P8?.
A.5:13
Thur,. b
It is closely related to
C
production function.
to labour, capital becomes and/or treated as relatively cheap factorinput and is substituted for tha relatively expensive labour.
The
if' < 1.
It is difficult, hers,
ASe14
factor-input increases indefinitely.
o f
when
^
if
>
\r
<
*5
<f
) to take any
(S '
5./
ynG
j/
2/
3/
A.5 s!5
tion rate of the services of the capital stock) are fairly difficult
to gat.
y is
function
Log ^
Log A + o{ Log y- + u
(5)
where s
2/ i,
1/
2/
A 5 : 1 6
o<
. A
Srhen
ot
And
2/
A5s1?
1/
of substitution between the factor inputs.
1st Method:
Log ~
log A
{ p Log V
I
j$
(6)
x
=>
is the capital productivity,
where
+
9
is
The intercept
and
Log
Log Z ~ <s"log b
= (1-^)
2nd Method g
Log ~~
where wL
rf.
+u
(?)
is tho
SSI
P.171-1S2.
2/ Capital productivity = Net value added by manufacture par unit
capital employed.
A.5 s18
(i-
'
-g ~
i/
The relative factor shares method has been used by Kravis,
and Bell
Solow,
1/
2/
3/
Solow, R
op.cit.
. M . sCapital,
A .5 j 1 9
0r o u p s .
Industry
same
industry
technological
marginal
i,n
the
the
Such
groups
among
set
differs
up
difference
csss
same
The
function
niven
they
are
further
from
noticed
of
on
the
croup
assumes
tnem
across
the
linear
to
be
even
the
in
fact
another.
factor
within
same
for
cauntryto
ir, t h e
firms
pronounced
countries,
one
i a d u s t .r-
mo: e
are
different
be
aggregation
that
and
nav
cne
country.
envisages
c;if f e r e n c e s
tics
chat
But
very
substitutability
the
suc-.egj.ons
same
industry
homogeneous
operating
of
groups
production
ir, p e r f e c t
2/
markets.,
But
belonging
well
to
this
the
defined
market
operating
under
t\
Arrow,
pp t
2 /
more
K j ;
but
the
rather
model
has
fh&asry;
In
spread
do
fact,
across
have
to
assumption
competition
general
and
on
seems
been
to
operate
and
RJ1.
t i u t n
undor
are
linear
theoretical
suggested
i'.inhas;
they
same
be
fi.-m.
space
that
the
the
by
i" o l d u t :
S c l o e : o p .clt .
226-227.
Ohrymes
has
provided
geneity
and
perfectly
functions",
1965;
of
broad.
region,
Thus
function
H.B.
very
group'
given
perfect"
'Sortie E x t e n s i o n s
and
substitution
1970.
data
and
3.8.
Kadsnes
partly
functions",
tost
ic s ! :
of
P.3.,
Two Digit
of
such
the
Uis
Economics
Ohrymes,
for
o;
ccmpt.itive
of
Review
However,
s r - :'
Review
also
Correction",
3/
of
condition?.,
the
is
incuctry
production
limitation.
^/
same
boundary
different
homogeneous
assuror ioc
is
and
least
spur res
Hates
on
the
Economics
feldstein,
M . S .{"Alternative
Production
function
for
o e s -
of
Zarembka,
and
bias.
Methods
Britain",
JLno.fr
cl
Homo
o
Just. ,.>i
No.-i,
P .{"Elasticities
Industries:
Statistics,
iuc>
Vol.52,
partly
cn
of
LtS
No.1,
'o f r:i s o t
oroc.uctj.vr
S tatistics, lol.AS,
of
S u e rMar'a 1: ,
Estimation
and
of
Ohry.no
5 t a b l e t leu,
inconclusive
to
of
rsr:
Manufacturing
S o m e
Review
Cf l
anc
Economics
test,
assumptions
markets
Estimating
E c o n arnica,.
Uol.34,
No.3,1966
CES
M o . 136.
't C 'l
A 5 s20
which incorporates the conditions of both perfect and imperfect
markets, while estimating the CS production functions for British
manufacturing industries.
the same industry group(at the stats or the regional level) are
operating undar perfect or imperfect market conditions, the trua
values of elasticity of substitution (
1/
than unity.
1/
A,5 s21
A.5.4
The most
production function!
X = CXl.1-0<
where
X = output
'
(1)
A, and
a r c constants.
however, is of
A.5.4(1)
dL
Hp K
dX
,
,
o< o<
(l-cx) AK
L
= o< AK
0)
(2)
dK
Hence;
MRTS
-o<
( i~<)
C* AK
'!<L
AK
CK~1
HP,"
KL
MAT!
1/
wL
1/
_ ]
L
1- o(
L
P)
(4)
A .5 s22
"
A ik/Q
"v:./rv
(k / l )
b -
/ Am'V
m
qtc^ |
wa r s
A(K/t)
wrtskl
( k/
MRTSk i
(5)
l)
d PIRTS..
dwrr
Thus,
(6)
1-o<
*N V
1-o<
cK
Jii/kL
CK
PIRTS,,.
isL
PIRTS,
XL
(K/L)T
XL
(iW)ff ft
(?)
The form of
though assumed to be